, 'I ..

Verification & Valuation of 11

UNIT 7 CATION & VmUATION names of the investments, dates of acquisition of securities, their face value, cost price,
book value, paid-up value, market value, rates of interest, dates of interest due, a x * Assets and Lirrbilities,II,

OF ASSETS AND LIABILITIES II . ; deductions etc. at the date of the Balance Sheet.
2 ) That a comparison of the schedule of investments with the ledger accounts does not
show any discrepancy.
dkl
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Structure b! That an examination of the purchase of investments shows that the has been duly

Objectives
Introduction
Verification and Valuation of Investments
I authorised by the Board of Directors,
4) That the prices recorded to have been paid by the company for the purchase of
securities are fully supported by their letters of allotment.
That in Case securities have been purchased in the secondary market, stock exchange
quotations, payees' receipt, and brokers' voucher confirm the price paid for investment.
Verification and Valuation of Current Assets '
7.3.1Cash in Hand 6 ) That all investments made by the company and included in the Balance Sheet are
7.3.2 Cash at Bank ' . actually in the name of the company.
7.3.3 Book Debts 7) . That funds used in investments are in conformity with the provisions of the
7.3.4 Bills Receivable . *
menlorandum and articles of association of the company in respect of such assets.
7.3.5 Loans and Advances
8)' That all purchases and sale of securities are fully supported by adequate approval of
Verification and Valuation of Stock-in-Trade
the authorities.
7.4.1 Method o f Stock Taking
7.4.2 Basis of Valuation 9) That a personal inspection of all the securities simultaneously satisfies the auditor in
7.4.3 Auditor's Duty respect of their existence.
Verification of Specific Liabilities 10) That a Register of Investments is maintained by the company incorporating relevant
7.5.1 Trade Creditors details about the securities acquired and prices paid and these details tally with the
7.5.2 Bilks Payable schedule of investments as well as with the securities.
7.5.3 Outstanding Expenses 11) That if some of the securities of the company are in safe custody of a bank, banker's
7.5.4 . l~icomesReceived in Advance
7.5.5 Loans
certificate is'obtained as a supporting evidence showing the names in which securities ,
are registered. \
7.5.6 Continge~ltLiabilities
Let Us Sun1Up 12) That an examination of different securities and other documents shows that all
Key Words securities are free from any charge or encumbrance.
Answers To Check Your Progress 13) That if some of the sec6rities have been transferred to or by the company, their transfer
Terminal Questions deeds are jn order.
,,.14) That proper vouching is done for entries in the Cash Book or Bank Pass Book in
respect of securities sold during the year.
7n0 OBJECTIVES 15) That proper provisions have been made for interest or dividend accrued during the year.
16) That all investments have been valued properly on the basis of their cost price or
After studying this unit you should be able to market price whichever is less, i.e. adequate adjustment is made for any decline in the
, book value of securities in comparison with their,market value.
o explain the process of verification 'and valuation of investments
17)-That a separate register is maintained for investments which are not held in the name of
apply the principal considerations to certain current assets like cash, book debts, stock, . the company showing the purpose of such inyestments.
etc. 1
18) That interest and dividend received on investments have been duly-credited in
respective ledger accounts and provisions have been made for interest accrued but not
o explain the method of Verification of some major liabilities.
received or dividend declared but not collected.
-- 19) That amount due on partly-paid shares has been shown as contingent'liabilities.
7;1 INTRODUCTION 20) That the total amount of irlvestfnehts shown il; the Balance Sheet cohsisting of different
, types of securities are pro$qy disclosed in the financial statements.
In Unit 28 you have learnt hbw important verification and valuation are in the process of
auditing. Our present discussion is in continuity of our study in the last unit. While xVe had
y
These considerations help the audit r in verification and valuation of investments. Let us
now study the process as applicable to some current assets.
devoted our attention in Unit 28 to the principles of verification and valuation aqd their \
application to some important assets in a company, we shall now discuss in this dnit the
praetickl consideratioils required for the verification and valuation of some other assets as
, Check Your Progress A
1) Naine three forms of securities suitable for investment:
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well as some liabilities.. '

i) ...,..\............
ii)
7.2 VERIFICATION AND VALUATION OF iii)
7
I INVESTMENTS of return on investment:
. $

. ' $ . .
ii) ...........................
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A company may utilise its surplJs resources in investments. Normally such investments are -. iii) .........................; . . .
made in securities like shares, bonds and debentures. The major task of an auditor is to '*.3. ) Give three methods-of valuation of .-vestment:
verify the existence of such investments and to ensure that they are shown in the Balance :. if
i .. ................
Sheet at a correct value. .. ii) ................ I .

: ................i
i ) I . 1
. . 111)
The process of verification and valuation of investments should include the following i
4) Identify three qources of making investment:
, I
considerations by the auditor: I -.
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<
, . I)--.-That-thecompany maintains aschedule of investments for the auditor showibg :,.
.
1
I
Vouching and Verification iii) ..................
5 ) Examine the audit implications of the following:
i) Interest accrued but not received
ii) Dividend declared but not collected
iii) Interest received but not credited
iv) Securities sold in market at a higher price
6 ) Show the meaning of the following:
i) Allotment
ii) Brokerage
iii) Premium
iv) Discount
v) Partly-paid Share
- ctaims which have-to be recovered from them at the earliest.
7.3 VERIFICATION AND VALUATION OF CU NT
ASSETS
Some of the current assets which we intend to examine from the point of view of their
verification and valuation are : Cash in Hand, Cash at Bank, Book Debts, Bills Receivable
and Loans and Advances.
7.3.1 Cash in Hand
Misappropriation or embezzlement of cash has been a common technique of fraud. The
auditor, therefore, has to be very careful in verification of cash in hand. The major appraacli
of the auditor regarding verification and valuation of cash i i hand should be to:
1) Make surprise visits to the offices where cash is kept.
2) Count the cash balance and compare it with the balance shown in the cash book,
particularly at the closing or opening time.
3) Take note of the shortage or surplus of cash in the presence of the cashier.
4) Obtain a certificate of shortage of cash from the cashier in case of such discrepancy.
5) Ascertain the balances in respect of (a) cash at branches, (b) cash with agents, (c) cash
in transit. (d) stamps in hand, (e) petty cash, and (f) cash in hand, and ensure that they '
are not mixed up at the time of their verification.
6) Check simultaneously the different types of cash balances maintained by the company
so that shortages of one are not met by transfer from another balance.
7) Ask the company preferably io deposit all cash balances available on the date of the
Balance Sheet in bank accounts when he finds it difficult to count'them at the close of
the year.
8) Examine the receipts and payments shown in the cash book and verify its balance on
the day he conducts a cash count
9) Inspect if the cash in hand includeis cheques, drafts or some temporary advances to staff,
they should be separated under authority and properly recorded in books of account.
10) Discourage the practice of keeping substantial amount of funds as cash in hand from the
point of view of internal control.
11) Get certificates from the branch auditors where he finds it difficult. to erify cash in
hand at the branches of the company.
12) See that cash with agents or in.transit are duly supported by documentary evidence to
that effect.
7.3.2 Cash at Bank
Far the purpose of verification and valuation of cash at bank, the auditor should :
1) Reconcile the balance shown by Pass Book with the Bank Account balance of the Cash
Book.
2) Obtain a Certificate of Balance in company's account as on the date of the Balance
Sheet from the bankers.
3) State the nature and balance of bank deposits under respective heads such as Fixed
Deposit, Current Account Balance, Savings Bank Account balance, etc.
4) Ensure that the pending items on the date of the Balance Sheet are subsequently
adjusted, e.g. cheques issued but not presented for payment, cheques deposited but not,
credited, etc.
5 ) Confirm that cheques issued for more than six months are treated as unpaid cheques and Verification & Valuation of
Assets and Liabilities I1
the relative entries are reversed.
6) See that cash at bank is reconciled even up to the date on which audit is being done.
7) Examine the Fixed Deposit Receipts in respect of their dates of issue, amount, rates of
ibterest, name of the company, etc. and get the interest accrued on deposits during the
year duly adjusted.
8) Conduct further enquiries about the security lodged and interest charged by. the bank if
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the bank account of the company shows a debit balance owing to some overdraft.
7.3.3 Book Debts
...
Books Debts comprise such outstanding balances against customers and other.business
The auditor should adopt the following procedures for the verification of Book Debts in a
company:
1) Circularisation of debtors: The auditor should arrange to obtain a direct confirmation
of balances from the debtors by sending letters. This may be done on a selective basis
including such categories of debts which are: (a)'substantial in amount, (b) year-end
debts, (c) relating to the principal customers of the company, and (d) showing nil
balances. If any discrepancy is discovered from the replies of the debtors, or if some of
U u e r s are received back wndelivered, the auditor should conduct further enquiries in
the matter. The auditor must also be careful to examine :
I a) amount paid by debtors, but not credited in their accounts;
b) goods sold on credit, but customer's account not debited;
c) disputed balances owing to some claims or complaints; and
d) credit notes issued to parties.
, 2) Checking year-end receipts: The auditor should ensure that all payments received
from debtors, particularly towards the closing of the year, are properly credited to their
I accounts. Such receipts must also be supported by duly authorised vouchers issued by
the company acknowledging payments in respect of debts;
n ~ and doubtful debts: The auditor should first obtain a schedule of
3) ~ s c l r t a i n i bad
'1- bad and doubtful debts from the company which should be duly certified by a
," responsible official. He should then examine the possibilities of realising such debts and
check the amount elltimated under these heads. The auditor should also take into
account the following faclors :
a) the normal period for which credit is normally granted by the company and the age
of the debts under consideration;
b) cheques issued by the debtors but dishonoured on presentation;
C) current financial position of the party and his capacity to repay the debt;
d) unusual delay in recovery of debts;
e) failure to honour commitments of instalments to redeem the debt; and
i') nature of securities, if any, offered for the debt.
The auditor should also consider : (i) the terns of credit allowefl by the company,
(ii) cash discounts offered for timely repayments, (iii) erratic ppyments made by
parties, (iv) increasing balances of individual debts, (v) parties going into liquidation,
, (vi) pariies who are untraceable etc. These factors govern the botal amount of book
debts as well as their classification into good, doubtful and bpd debts.
It is only when the auditor is fully satisfied about the irrecoyerable nature of a debt,
despite a11 efforts of the company, that he should allow a ddbt to be written off as a bad
debt. In case same of the debts appear to be doubtful in respect of theirgrecovery or
realisation, a suitable provision should be made for such debts in the accounts.
7.3.4 Bills Receivable ,,
Billi of Exchange which remain unpaid on the date of the Balance Sheet are included under
the head 'Bills Receivable'. This is an asset which is normallk converted into cash if the bill.
is met on its due date. Some of the bills, however, may be digcounted through the bankers
before their maturity. In that case,.the aqount received may be slightly less than the face
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Voucl~ingand Verificat$n value of the bill. If a discounted bill is dishonoured, it becomes a liability for the company to
repay what it has received from the bankers.
In view of this nature of the item, the auditor has to consider the different aspects of the
transaction to establish the identity of Bills Receivable. The process of its verification and
valuation by the auditor should incorporate the following :
1) Get from the company a schedule of unpaid bills in hand on the date of the Balance
Sheet.
2) Inspect the bills in hand and compare them with their total in Bills Receivable Account.
3) Check the proceeds received from bills discounted.
4) See that the bills are properly drawn, stamped, duly accepted and not overdue for
payment.
5) Make provision for possible losses on bills likely to be dishonoured.
6) Ascertain that bills matured but not paid have been duly renewed.
7) Obtain certificate from bankers in respect of bills kept with them in safe custody,
deposited for collection, or used as security for loans.
8) Confirm that bills discounted before the close of the year but likely to be dishonoured
are shown as contingent liabilities at the bottom of the Balance Sheet.
9) Ensure that bills dishonoured have been properly noted and protested, they are excluded
from Bills Receivable in hand and the acceptors of the bills are treated as debtors.
10) Examine that discount charged on bills maturing after the date of the Balance Sheet arc
treated separalely and show11as 'Rebate on Bills Discounted not yet due'.
I I) Exclude such bills from the Balance Sheet which might have been retired before their ,
maturity or before the date of the Balance Sheet .and check that their proceeds have bee;
properly credited in the Cash Book.
7.3.5 Loans and Advances
Loans and advances may be gi\;en by the company to different parties either as fully '
secured, partly secured or totally unsecured. Such loans are temporary advances likely to be*
recovered soon. They are, therefore, supported by their own terms and conditions which
govem the quantum, interest, repayment and security of loans.
Verification and valuation of loans and advances by the auditor should be based on the
following considerations :
1) Obtain a list of all advances and compare them with the respective balances in the
ledger. . and misappropriation'. There are enough possibilities of theft, pilferage, wastage, issue
2) Ascertain that the advances are properly authorised and are being recovered regularly in
agreed instalments.
3) ErAsur~that adequate provisions have been made in respect of irrecoverable advances.
4) Inspect loan agreements or correspondences relating to the terms of the loan.
5) Refer to the Memorandum and Articles of Association of the company for the poIicy
and procedure on loans,and advances.
6 ) Confirm that loans are sanctioned by persons who are having the financial powers and
administrative competence to do so.
7) Seethat loans are duly acknowledged by the debtors and pronotes are executed or bills
of exchange are drawn for the purpose.
8) Examine the terms and conditions on which loans are-jgarrted and satisfy that they are
not against the interest of the company or its members.
9) Check the securities or documents offered for loans, e.g. promissory notes, land
mortgage deeds, insurance policies, etc.
10) Enquire the rate and date of interest payable and see their adjustment in accounts.
'
11) Consider the possibilities of some of the loans outstanding for a long time and the
chances of their being bad or doubtful debts.
12) Get the outstanding balaiiccs of loans confiqmed by the borrowers.
These are some of the current assets which need audit verification'and valuation. Let us now
discuss the process of verification and valuation of another important asset appearing in the
Balance Sheet, i.e. Stock-in-Trade.
Check Your Progress B
1) How can you check the authority of advances made by a company?
........................................................................................................................................... Verification & Valuation of
Assets and Linbilities 11
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2) How can you verify the cash balance of an office which you cannot visit?
............................................................ ..............................................................................
.i)What is the method of verification of a debt which is fully secured?,
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4) How ;ire such Bills Receivable treated in accounts which: are not honoured on maturity?
...........................................................................................................................................
............................................................................................................................................
5 ) Fill In the blanks :
i) The best method of verificat~onof Cash in Hand is .....................
ii) It is .....................to keep substantial arnounl of funds as Cash in Hand.
iii) Difference lletween Pass Book and Cash Book balances needs .....................
iv) A debt which cannot be realised should be treated as .....................
V) Bills Receivable discounted before maturity, but likely to be dishonoured on
presentation are considered as .....................
TRADE
S~ock-in-Tradeis.3 floating asset. I t is a part of inventory. It is either : (a) to be conveired
into cash by sale, or ( b ) to be used in the process of production, or (c) is meant for
consumption in producling goods or services. It is, however, subject to both manipulation
without.prope1. authority, non-entry of goods received or destruction by fire of stock. In all
such cases, a loss is caused to the organisation. This needs an effective system of internat
control so that both goods inwards and goods outwards remain under constant watch.
Besides safety and security of stock. notional'fluctuations in its value need supervision. The
auditor, thereforo, must ensure that the stock-in-trade as shown in the Balance Sheet is
actually in existence arid that their value too is in accordance with the generally accepted
principles of accounting.
Wc shall now discuss the problem of verification and valuation of stock-in-trade under three
main heads : (i) Method of Stock Taking, (ii) Basis of Valuation, and (iii) Auditor's Duty.
7.4.1 Method of Stock Taking
It is necessary to verify the stock in hand from time to time. For the purpose of determining
the quantity as well as value of stock-in-trade as on the date of the Balance Sheet, the
following method is adopted :
-
Opening Stock (at the beginning of the year) .....................
Add Purchases during the year .....................
Less Sales duryng the year .....................
Closing Balance, i.e. Stock-in-Hand at
the end of the year .....................
A normal margin niay be allowed for wastage, shrinkage or evaporation of stock in making in
calculation. In case of raw materials, etc., purchases and sales may b e substituted by the
estimates of materials received and issued in stock,
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V o u c l ~ i n gand Verification Once the quantitv of goods 'in hand on a particular date has been ascertained from records, it
.may be verified through the process of physical count. then the company will be in a position
to know whether there is any, shortage or surplus of stock and the possible reasons fol.,such
discrepancy.
Verification of stock by pllysical count is the duty of the management. The auditor, however,
should make himself present at the iime of physical count (stock taking'). He should observe
whether the method of stock taking is satisfactory and should apply test checks on the
verification date by management.
Principal considerations rcparding stock taking are as follows: -
1) Stock should be checked normally at the time of closing the year.
2) Each item in the storc and its quantity should be recorded in the Stock Sheet.
3 ) The recorded quantity should be cross-checked by another set of staff.
4) A responsible official should mention the rate against each item which is applicable for its
valuation.
5 ) The total value of each item (quantity n~ultipliedby rate) should be dete~l~linedand stated
in the Stock Sheet. ..
6) All calculatio~lsshould be checked once again by another staff and signed by him.
7) The Stock Sheet sl~oiildbe finally submitted to the appropriate authorities of tlie company
for their appro.val and signature.
8) The entire process of stock taking should be conducted under the supervision of a
responsible official.
7.4.2 Basis of Valuatioli
Valuation of Stock-in-Trade is an importance process of accounting and auditing. omi ill;
stock is valued at cost or net realisable value whichever is lower at the date of the Balance
sheet. It is compared to the market price or replacement price also. But the common principle .
is to write off expected losses. Anticipated profits, however, are not taken into account.
Correct valuation of stock affects the correct determination of profit or loss of the company for,
the current year as well as the next year. , '1 1) Reconcile whether the quantity and cost of items shown by the stock sheet, stock book,,
You know there are various method of valuation of stock. But, the noimal practice of valuation
of stock is to take either of the three methods of costing:
a) FIFO b) LIFO c) Average Cost
. -.
Whatever basis of valuation of stock is used, it must be reasonable and must followed consist-
eiitly from yeai to year. Then. it is important that we take into account a fall in the price of
goods, even if it is owing to obsolescence or damage, but should not value the stock at a pricg
higher than the cost pkice.
7.4.3 Aud.itor'sDuty
It is an inlportailt pa;.; of the duty of an auditor to verify and value the stock-in-trade. It is,
however, extremely difficult for an auditor to verify each and every item of stock. Proper
valuation of the stock too may be difficult for them because of his limited technical knowledge.
He may, therefore, relay upoil the stock records maintained by the compaily and apply tests
which are practicable in the circumstances.
Moreover a certificate should be obtained from the responsible official of the company in
respect of a detailed procedure followed for stock taking and the method of vali~ationused.
The certificate should clearly state the following:
to the best of my knowledge and belief the quantities and values shown in the stock
i)
sheets are 'corect;
ii) items included in the stocks are the property of the company oc!y;
iii) i o such item has becn included in the stock for which purchase has not been recorded in,
the books of account;
iv) no such item has been included in the stock which has been sold but for which delivery
a has not taken place; ' idffects the correctness of the financial statements 111 the same way as the assets. In case of
v) depreciation has been provided for all such goods that are unsuitable for sale or have
been damaged or are obsolete;
vi) the basis of valuatioa of stock is the same as followed in the previous years; and
vii) plants, used tools, fuiniture or any other fixed assets has not been included in the stock.
It is the not the duty of the auditor to take stock. He may believe the officers of the company for Verification & Valuation of
the stock-in-hand. But l ~ wille be considered to have failed in his duty if he does not exercise Assets and Liabilities 11
Ireasonable care and skill in verifying the reports and stalements relating to stock. A11 auditor is
also not a valuer. But he will be held responsible for not detecting over-valuation of stock. He,
iherefore, must satisfy himself about the physical as well as financial accuracy of the stock-in-
trade.
Gerification and valuation of Stock-in-Trade should receive the following audit considerations:
'1) Check the stock sheets in respect of the quant.ities of different items shown, the prices
charged against each and signing authority who has supervised tlie total valuation.
2) Examine the method of costing applied for vah~ationand compare it with the information
I available in costing records or invoices.
3) Text a few specific items appearing in the stock statement, both in terms of their quantities
and prices.
4) Look at the additions and their carry forwards on the next page.
5) Ensure that no item of stock is over-charged by loading undue additional expenses like
transport duty, insurance, carriage, etc.
6) Exclude items which do not form part oftlle closing stoclc ofthe coinpany, e.g., goodd sent on
consignment, go'ods at warehouse, ports or w i ~ hcustonls.
7) Evaluate tlie method of stock rnaintenance and stock taking followed by the company from
the point of view of safety and internal control ensuring that the process if free from any risk;
also obtain a copy of the instructions issued to stal'l'for stock taking.
8) Confirm that proper depreciation has been provided fi.0 defective, destroyed or obsolete
stock.
9) See the coi~espondiilgenkies in the Goods Inward and Goods Outward Registers
pa~ticularlythose relating to year-end transactions.
10) find out if the stoclc sheet includes such items which are normally not part of the stock-ih-
: trade, e.g, loose tools, plant, f~~rniture, etc.
trading account and balance sheet tally.
12) Conduct vouching of some sales and purchases affectiilg the balance of stock-in-hand.
13) Compare the current rate of Gross Profit on Sales with that of previous year and identify if
there is any major difference without reasonablcjustification.
14) ..Make provisioil for losses on account of unsaleable or unsuitable goods by writing them
off in books of accoui~t I
Now a days, standard accounting practices all over the world require that auditors should carry
out necessary audit$rocedures to satisfy himself about this accuracy of the amount at which I
inventories are included in the financial statements. I
Check Your Progress C .-
1) Why should d ~ auditor
e obtain a certificate rrom a responsible official of the company in
respect of Stock-in Trade ?
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2) State whether the following stateinents are Truc or False.
3 Over-valuation of stock iillproves the dividend paid by a company.
ii) All stock taking as illust be supervised by the author,
iiii)"The value of Stock-in Trade depends 011 ~ t current
s market price.
iv) Goods in transit forin of Stock-in-Trade.
7.5 VERTFICATPON OF SPECIFIC LIABILITIES
Like verification of assets, verification of liabilities is ail equally important process of auditing. It
(I~abilities,
however, the major problems of verification are:
a) Over-statement of liabilities,
b) Under-statement of liabilities, or
C) Omission of liabilities.
 a) Get a schedule of advances received from different parties for specific purposes; Verification & Valuation of
Ensure that incomes received in advance are not included as the incomes of the current Assets and Liabilities I1
Vouching and verification In all such situations, neither the Profit and Loss Accounr nor the Balance Sheet u ill give 3 b)
correct picture of trading operations. Besides a normal verification of liabiliries. the auditor year; and
should also obtain a certificate from the company: C) Check that such advances are noL omitted from the Balance Sheet.
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i) that all liabilities for purchases, expenses or any other item existing at the date of the 7.5.5 Loans
Balance Sheet have been included in the books of account; and
ii) that all the contingent liabilities of the company for the period have been dibclosed in a Verification of loans obtained by the company should be based on the following procedure :
footnote to the Balance Sheet or have been provided for.
I) Check the authority under which loans have been required and procured by the
Let us now discuss the process of verification of some major liabilities like: <$) Trade company.
Creditors. (b) Bills Payable, (c) Outstanding Expenses, (d) Incomes Received In Advance; 2) Examine the various agreements and correspondence relating to the loans.
(e) Loans, and (f) Contingent Liabilities. 3) Show in the Balance Sheet whether the loans are secured against mortgage of any
property.
7.5.1 Trade Creditors 4) Get confirmation from the parties regarding the amount of the loan outstanding at the
'
date of the Balance Sheet, interest due and security offered.
The method of verification of trade creditors should include the followin$ : 5) Refer to the Memorandum and Articles of Association of the company in the context of
their provisions on borrowings.
1) Get a schedule of creditors from the company and examine it with Purchases Ledger,
6) Ensure that interest payable on loan has been paid to date or is recorded ks unpaid in the
Bills Payable, Cash Book, Credit Notes, Goods Inward Book, Returns Outward Book,
books of account.
Invoices, etc.
' 7) See the agreements with the bankers on the terms and conditions of bank overdrafts.
2) ,Ensure that all purchases made during the year, particularly the year-end purchases, afe
recorded in the books of account.
7.5.6 Contingent Liabilities
3) Obtain confirmation from the creditors in respect of their outstanding dues to the
company and compare them with the schedule of creditors. Contingency is a condition or situation the ultimate outcome of which, gain o r loss, is
4) Analyse the percentage of gross profil earned this year, compare it with that of the known or determined only on the occurrence'or non-occurrence of one or more uncertain
previous year and identify if there is any remarkable change-without adequate
future events. A contingent liability is a possible liability arising from previous dealings or
justification. actions which may not be a legal dbligation in the future.
5) Test such items of creditors which have not been paid for a long time and find out the
reasons, Contingent liabilities should be put to the following verification :
6) Check the possibilities of a payment already shown to creditors, but not actually paid
1) Chgck that all such known and unknown possible liabilities which may o r may not arise
and amount misappropriated. ' i n (he future ahincluded as coptingent liabilities.
2) See that contingent liabilities are shown separately as afootnote to the Balance Sheet.
7.5.2 Bills Payable 3) Pay partibular attention to,. ireins
- . like :
Audit verification of Bills Pdyable needs the following considerations : a) -Bills Receivable discounted but not matured
b) Unpaid calls on partly-paid shares
1) Obtain a schedule of Bills Payable in hand as on the date of the Balance Sheet from c) Liabilities under guarantees given by the company
some responsible official of the company. d) claims against the company not ackngwledged as debts
-2) eheck the Bills Payable Book, Bills Payable Account and Cash Book in respect of bills
already paid and still payable.
i e) Arrears of dividend on cumulative preference shares
f) Pending legal actions or undisposed claims
3) Get confirmation from the drawers or holders of the bills as regards amount due on the
bills accepted by the company. i 4) Examine if some of these liabilities need any provision to be made in the books of
account and the amount to be specifically reserved for the possible losses.
4) Examine if a bill has been accepted by creating a charge on any asset of the company
, and this has been properly disclosed in the Balance Sheet. 5) Refer to the Directors' Minute Book and correspondence with the legal advisors of the
company.
7.5.3 Outstanding Expenses 6) Get the required additional iriformation from the officials of thk company and judge the
true nature of liabilities to be treated as contingent liabilities for the year.
Outstanding expenses need the following approach to their verification :
1) Obtain .a certificate from the company that all unpaid and accrued expenses relating to 7.6 LET US SUM LIB
the year have been properly included in respect of items like Wages, Salary, Rent, 1
1

Interest, Discount, Commission, Electricity Charges, Audit Fee, Legal Expenses, etc.
2) Check the respective entries of the Cash Book to verify the actual amount of payment
already made on such heads which \how outstanding expenses.
/
It is the duty of the auditor to ensure hat the financial statements of thecdmpany show a
true and fair view of thestate of affa rs of the.business for the period under review. Any
mistake either'ln the quantum or value of an asset, or in including or excluding a liability,
3) Ensure that all outstanding expenses relating to salary and wages have subsequ&tly means that both the Profit and Loss Account and the Balance Sheet give a position which is
been paid at the commencement of the next.year. quite different from the real financial position of the company; .
4) Coinpare all paid and unpaid expenses of the current year with those of the previous
year so as to identify any appreciable variations. Our study in this unit allows us to develop the following guidelines for Verification and
Valuation of Assets and Liabilities .
5) Estimate if the increase or decrease in wages, materials or other expenses is
proportimate to the increase or decrease in the turnover.
1) Investments : All investments are to be checked with their schedule and they
6 ) Assess the causes of any material change in the rate of gross profit as compared to that
should be valued at their cost price or market price whichever is
of the previous year.
lower.
7.5.4 Incomes Received in Advance 2) ' Cash i'n Hand : There should be surprise visits for cash counts, the balance in
* -hand9should be kept at the minimum possible limit, and all cash
To verify this item, the auditor should do three things :
Vouching and Verification receipts and payments must be duly authorised and supported by
proper evidence.
3) Cash at Bank : Difference between the Cash Book and Pass Book balances
should be periodically reconciled and necessary adjustments
should be made for all outstanding bank transactions.
Direct confirmation from debtors, checking year-end rweipts and
4) Book Debts :
examining the amount being transferred to bad and doubtful
debts account need proper audit attention.
5) Bills Receivable : All unpaid bills in hand likely to mature after the current year and
which have not ben discounted as yet are included in the final
balance needs audit confirmation.
6) Loans and Advances :: Authority under which such loans and advances are granted,
system devised to recover the dues as per the mutually agreed
schedule of payments and confirmation of the parties in respect
of the balances shown against them at the date of the Balance
Sheet need consideration.
Methods and frequency of stock taking, consistency and
adequacy of the basis of valuation of closing stock, responsibility
with which the management has been protecting the safety and
security of Stock-in-Trade. and the application of accepted . '
principles of accounting to record the transaction; relating to:
stock demand proper evaluation.
8) Trade Creditors : Check the scliedule of creditors prepared by the company as on
the date of the Balance Sheet, obtain a direct confirmation from
the creditors in respect of substantial outstanding balances and
examine the possibilities of payments shown in books but not
actually made to parties.
9) Bills Payable : All unpaid bills on the date should be verified with the help of the
corresponding schedule and books of account. .
10) Outstanding Expenses payable but not paid, i.e. payments due but not made
Expenses : are shown as a liability. This, however, should be written off as
sbon as the payments are made possibly at the beginning of the
next year. The company should have a statement and certificate
of such outstanding expenses which should be checked by the
auditor.
. 4) State the system of verification and valuation of Loans and Advances.
11) Incomes Received A schedule of all such incomes which have'i~otaccrued but are
in Advance : received during the year should be prepared by the company and
checked by the auditor.
12) Loans : Borrowings made by the company should be examined in respect
of their purpose, amount, authority, limit tlnd arrangements made
for the payment of interest and repaylnent of principal.
13) Contingent Possible liabilities which are uncertain as on the date of the
Liabilities : Balance Sheet either because they have not been admitted by the
company as liabilities or the parties have not beell able to
establish their claims in respect of those itenxare to be show11as
an information by way of a footnote in the Balance Sheet.
7.7 KEY V'ORDS
Accrued Income :Income due but not received.
Broker : A middleman between the buyer and seller usually charging far his services from
both the parties.
Circularisation : Issue of a circular letter addressed to the selected parties containing a
unifonn message.
Debenture : A form of corporate security used for borrowing funds at specified rate of
interest and date of maturity.
Disclosure :Required information to be shown in the Balance Sheel in the specified
manner.
-.
~ l v g e n d: Profit per share declared by a company for its shareholders. Verification & VaJuation of
Assets and Liabilities I1
Evidence : A relevant or reliable voucher, document, deed, correspondence or situation.
Interest :The fixed rate at which payment has to be made or received on loans, advances or
deposits.
Irrecoverable Debt : Dues which are found to be difficult in recovery despite the best
.efforts.
Pass Book : A record of transactions in the Bank Accountof the party as per the bank
ledger.
Stock Exchange : A recognised market where securities are sold and purchased at the
prevailing price through brokers. ,'
7.8 ANSWERS TO CHECK YOUR PROGRESS
A 1 (i) Equity Shares (ii) Debentures (iii) Bonds
2 (i) Dividend (ii) Interest' (iii) Bonus
3 (i) Cost Price (ii) Face Value (Par Value) ' (iii) Market Price .
4 (i) Public Issues (Primary Market) (ii) Stock Exchange (Secondary Market)
(iii) Individual Transfers (Personal Negotiation)
I3 5 , (i) Cash Count (ii) Dangerous (Unsafe) (iii) Reconciliation (iv) Rad Debt
" (v) Contingent Liabilities
' C 2 'i) True (ii) False (iii) False (iv) False
7.9 TERMINAL QUESTIONS
I..1) Discuss the process of verification and valuation of investments in a company.
b2) Explain the methods of verification of Cash in Hand and Cash at Bank.
3) How can the auditor ascertain the correctness of Book Debts shown in the Balance
r Sheet of a company'?
5) Give an explanatory note on the proble~nsof verification and valuation of Stock-in-
Trade.
6 , Discuss, with the help of examples of iteins appearing in the Balance Sheet of a
company, how an audito:conducts verification of liabilities.
Note: These q~restionswill help you to uriderstand the ~rnitbetter. Try to write
answers for them, bul do not subrnit your answers to the University. These
are for your practice only.
SOME USEFUL BOOKS
Porwal& Kappor. .-iiiditing, Theoiy arrd Practice, Kitab Mahal, Allahahad, (Chapters 9-'12).
Saxena R. G. P~.i~?ci/~les
rfAudifing, Himalaya Publishing House : Bombay, (Chapters 6-9)
Shanna Dr. T. R. Ar,ditiug, Sh&yaBhawan; Agara, ( ~ h a p t & 4 , 5& 6 )
K a n ~ aGupta
l and Ashok Arora, Furidamentals ofAuditing Tata McGraw-Hill Publishing Co. Etd.,
.d
New Delhi (Chapter 8 to 18).